July 26, 2007

Foregone Conclusions on Foreclosures

People with a few clues and a few grudges against all things Bush
seem to be delighting in telling us how bad things are out here in
California and how that augers ill for the economy. The keyword of
disaster is foreclosure.

I've been seeing ads on telephone poles for many months that promise
100,000 cash on seconds for something like 400 bucks a month. That
sounds very tasty, and in fact I have been restraining myself from
asking Pops to put up his house so I could have that kind of cash for
less than the price of my Beemer note. Alas when I called the 800
number on that telephone pole ad, nobody answered. So I put the notion
out of my head. Something fishy is going on.

And yet the advertisements on the AM radio persist, and while I
think that the Mortgage Minute Guy is above board, there has been a lot
of fakery going on. It's easy to get lost in the fine print and it's in
almost nobody's best interest to decipher all that for the average Joe.
Still, you don't have to be a rocket scientist to understand 'buyer
beware'.

The California real-estate marked defies description and common
sense. That's because there are some of the richest people in the world
here, and some of the nation's poorest. The house that I grew up in was
purchased in 1966 for about 30,000. The payment, which went to a
mortgage company called Lomas & Nettleton, was $177. That house
today would sell for something like half a million dollars. That makes
absolutely no sense whatsoever, except in California. I had a chance to
buy it for 180K back in 1989, but I wouldn't touch it with a ten foot
pole. In retrospect, I can say that was a financial mistake. On the
other hand I know somebody was murdered on that block that year. I
rented on the beach instead.

When the king of subprimes, New Century went under a couple months ago,
we started looking at the problem seriously. At the time, subprime was
about 20% of the market and the default rate was about 13%. The last
figures I saw was that they are now about 18% of the market and the
default rate is up to about 18%. Even though this is a small part of
the overall mortgage market, there are evidently a goodly amount of
mortgage backed derivative securities that are at risk and this is
hurting the big boys. Over at Tigerhawk, they are saying
that the health of all lenders may be in question, but it's too early
to tell if this is a big deal that requires tweaking from the Fed or
something we can get through without a heavy hand.

So the crisis isn't about foreclosure itself, but my inclination to
say that foreclosures are a blip may be premature. I know the craziness
in California and so take stories about foreclosures in Northern Cal
(having lived through the Dot Com Boom) with a grain of salt. There's
more to it than that. It is the cascading effect that foreclosures have
on big lenders that should concern us.

Comments

Foregone Conclusions on Foreclosures

People with a few clues and a few grudges against all things Bush
seem to be delighting in telling us how bad things are out here in
California and how that augers ill for the economy. The keyword of
disaster is foreclosure.

I've been seeing ads on telephone poles for many months that promise
100,000 cash on seconds for something like 400 bucks a month. That
sounds very tasty, and in fact I have been restraining myself from
asking Pops to put up his house so I could have that kind of cash for
less than the price of my Beemer note. Alas when I called the 800
number on that telephone pole ad, nobody answered. So I put the notion
out of my head. Something fishy is going on.

And yet the advertisements on the AM radio persist, and while I
think that the Mortgage Minute Guy is above board, there has been a lot
of fakery going on. It's easy to get lost in the fine print and it's in
almost nobody's best interest to decipher all that for the average Joe.
Still, you don't have to be a rocket scientist to understand 'buyer
beware'.

The California real-estate marked defies description and common
sense. That's because there are some of the richest people in the world
here, and some of the nation's poorest. The house that I grew up in was
purchased in 1966 for about 30,000. The payment, which went to a
mortgage company called Lomas & Nettleton, was $177. That house
today would sell for something like half a million dollars. That makes
absolutely no sense whatsoever, except in California. I had a chance to
buy it for 180K back in 1989, but I wouldn't touch it with a ten foot
pole. In retrospect, I can say that was a financial mistake. On the
other hand I know somebody was murdered on that block that year. I
rented on the beach instead.

When the king of subprimes, New Century went under a couple months ago,
we started looking at the problem seriously. At the time, subprime was
about 20% of the market and the default rate was about 13%. The last
figures I saw was that they are now about 18% of the market and the
default rate is up to about 18%. Even though this is a small part of
the overall mortgage market, there are evidently a goodly amount of
mortgage backed derivative securities that are at risk and this is
hurting the big boys. Over at Tigerhawk, they are saying
that the health of all lenders may be in question, but it's too early
to tell if this is a big deal that requires tweaking from the Fed or
something we can get through without a heavy hand.

So the crisis isn't about foreclosure itself, but my inclination to
say that foreclosures are a blip may be premature. I know the craziness
in California and so take stories about foreclosures in Northern Cal
(having lived through the Dot Com Boom) with a grain of salt. There's
more to it than that. It is the cascading effect that foreclosures have
on big lenders that should concern us.